Choosing A Qualified IntermediaryFranklin Moore McLaughlin Esq., CPA
August 22, 2005 — 1,698 views
The role of the Qualified Intermediary is essential to completing a successful and valid exchange. The Qualified Intermediary is the glue that puts the buyer and seller of property together into the form of a 1031 Exchange. Where such an intermediary (often called an exchange facilitator) is used, the intermediary will not be considered the agent of the taxpayer for constructive receipt purposes.
A qualified intermediary is formally defined as a person who is not the taxpayer or a disqualified person who enters into a written agreement (the "exchange agreement") with the taxpayer and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer. The qualified intermediary does not actually have to receive and transfer title as long as the legal fiction is maintained.
There are no licensing requirements for Intermediaries. They need merely be not an unqualified person as defined by the Internal Revenue Code in order to be qualified. The Code prohibits certain "agents" of the taxpayer from being qualified. Accountants, attorneys and realtors who have served taxpayers in their professional capacities within the prior two years are disqualified from serving as a Qualified Intermediary for a taxpayer in an exchange.
Choosing a Qualified Intermediary
Due to the vital role played by a qualified intermediary in documenting the 1031 exchange and safeguarding the taxpayer's funds, and due to the lack of licensing requirements, the selection of a qualified intermediary is a vital decision. The taxpayer should select a qualified intermediary that will facilitate the exchange in compliance with the tax rules, that will take appropriate steps to safeguard the funds, and one that is reputable.
1. Compliance with the Tax Code and Regulations.
The owners and employees of the qualified intermediary should have a thorough understanding of all aspects of 1031 exchanges. Improper documentation or inattention to strict time deadlines has invalidated many attempted exchanges. The taxpayer should look for a qualified intermediary that is owned and operated by tax professionals, preferably tax attorneys who concentrate in real estate taxation. The IRS is constantly issuing guidance in this area, and the taxpayer should find a qualified intermediary that keeps abreast of these changes, as indicated by published articles, newsletters, or seminars presented by its principals.
2. Safeguarding Funds.
The qualified intermediary should have sufficient safeguards in place to protect the taxpayer's funds. From an insurance perspective, the qualified intermediary should have a fidelity bond to protect against theft or embezzlement, and an Errors and Omissions (E&O) policy to insure against losses resulting from an employees error and omission. From an operational perspective, the funds should be held with a strong bank (preferably one with a national presence), and they should be held in a dual signature account which requires both the signature of the qualified intermediary and the taxpayer to transfer funds.
3. Reputation of the Qualified Intermediary.
Since there is no licensing requirements for a qualified intermediary, a taxpayer must look at other factors to determine its reputation. Factors to look at are longevity in the industry, whether the qualified intermediary is a member of the Federation of Exchange Accommodators (the national trade organization for qualified intermediaries), and the reputation and experience of its principals. Determine whether the principals hold professional designations earned by study and experience such as a Certified Public Accountant or a Masters of Law in Taxation. Also check to see if the principals of the qualified intermediary keep abreast of current developments as indicated by articles, newsletters or seminars presented.
Due to its vital role, a taxpayer should exercise care when selecting a qualified intermediary to facilitate its 1031 exchange. The qualified intermediary should have a thorough understanding of all aspects of 1031 exchanges, it should take appropriate steps to safeguard the taxpayer's funds, and it should be reputable.
Franklin Moore McLaughlin Esq., CPA
All States 1031 Exchange Facilitator, LLC